Wednesday, June 22, 2016

Ironically, Chinese communist leaders may be the leading proponents of take-no-prisoners capitalism in the world today. China's dairy industry is an example: officials prescribe structural adjustment through market competition for the industry to escape its depressed state--basically a shake-out of weak players.

Communist party officials adopted a somber tone at a China dairy industry association meeting held earlier this month at a national dairy expo in Qingdao. They described the industry as facing "the most difficult stage since the melamine adulteration incident in 2008." Looking ahead, however, the officials expressed confidence that the discipline of vicious market competition is producing a core of lean, mean companies that will ensure a brighter future for the industry.

Officials speaking at the meeting cited three major problems plaguing the Chinese dairy industry: falling prices, difficulty selling milk, and big losses. The price received by large farms is down 10% from a year ago, and the price is down 15% for smaller farms. Dairy companies have reportedly cut back the volume of purchases by 10% as well. Financial losses by dairy farms were said to be as much as 50%, and spreading more widely.

The problems were attributed to falling consumer demand and pressure from lower-priced imported milk.

Dairy association official--and former vice minister of agriculture--Gao Jibin said this is a really tough time for the industry, even though there is no particular incident like the 2008 infant formula incident causing difficulties. However it's all relative, Gao said, pointing out that other industries are facing tough times as well, as are dairy producers in other countries.

Gao expressed hope that the industry will transform "from traditional to modern" and "from vulnerable to efficient" during the current economic slowdown and market fluctuations. Supply side reform "respects the market and peoples' needs," he said. Through "survival of the fittest" and "competition in a buyers' market," resources will be concentrated in the hands of the most competitive and innovative companies.

The objective is not an increase in quantity, Gao explained, but rather quality improvement. Supply side reform means upgrading the industry through modern science and technology, bringing in new material and equipment, development concepts, business models, and industry organization.

Current Vice Minister of Agriculture Yu Kang agreed that improvement of product safety was the core objective in establishment of policy support and supervision systems. He said the production model had been improved with great increases in milk per cow. Yu recited the supply side structural reform and competitiveness mantras. The Vice Minister urged listeners to maintain their confidence and insisted the industry should be guided by consumer demand. The Chinese market for milk appears to have reached a saturation point, with milk-dumping and excess supply. But in the long run, the Vice Minister assured industry participants that consumption would grow along with income and urbanization.

Gao Jibin agreed that China's dairy industry is a most promising industry with huge potential.

There was no mention of the usual knee-jerk prescriptions for hard times--subsidies or barriers to imports.

Apparently contradicting the "survival of the fittest" narrative offered by Mr. Gao, the article in China Livestock Industry magazine proclaimed that China's dairy industry is at a "new point of departure" of "harmonious development."

The article described the China Dairy Industry Association as an organization that serves as a "bridge to build relations between the communist party and government with companies, technicians, farmers, and consumers" designed to organize, coordinate and implement support policies.

Sunday, June 19, 2016

Agricultural officials in China will launch a series of soybean technique demonstration sites as part of their broader structural adjustment initiative. Agricultural extension officials will introduce techniques designed to raise soybean yields and reduce use of chemical fertilizer and herbicides. The program will budget 5.6 million yuan ($860,000) to fund dozens of 2000-mu (310 acre) sites in the country's frigid northeast and the Yellow River-Huai region of eastern China.

The "green high-yielding technology integrated demonstration" projects will encourage farmers to plant high-protein non-GMO soybean varieties for food use. The project hopes to make soybeans more profitable by raising yields and reducing expenses. By cutting chemical applications the project hopes to reduce expenses for farmers and make soybeans more environmentally-friendly. The document describing the program doesn't mention that chemical fertilizer use for soybeans is much lower than for corn--the crop that has crowded out soybeans in the project areas during recent years. It is unclear whether this is part of the 5.6-billion-yuan corn structural adjustment program announced earlier this year.

The project's emphasis on high-protein soybeans is notable. This is a reversal from the first subsidy for high quality soybean seeds (introduced in 2002) which encouraged farmers to plant varieties with high oil content in order to compete with imported soybeans for crushing to manufacturing cooking oil. Officials now appear to have thrown in the towel on high-oil beans. The domestic industry is producing mainly high-protein beans for tofu, soy milk and protein supplements--and having a hard time meeting the demand.

The soybean project reflects China's traditional emphasis on "demonstration" or "model" farms for disseminating new techniques. This model chooses certain villages or State farms to receive subsidized inputs and technical advice to adopt a technique wholesale. Rural officials are brought in to observe and replicate the technique in their home villages.

Six of the demonstration sites will be in the northeastern region near China's border with Siberia where the growing season is short--Bei'an and Nenjiang Cities and the Heihe State Farm Bureau in northern Heilongjiang, two sites in Inner Mongolia, and one in eastern Jilin Province. These sites appear to be intended to reverse the spread of corn production into these far northern regions by encouraging a return to soybean production and soybean-corn rotations. Technicians will distribute early-maturing soybean varieties to accommodate the short growing season. Other problems to be addressed are the lack of moisture, a fungus that causes white mold, root maggots, and harm to crops from herbicides. The demonstrations will feature crop rotations, soil preparation and deep ploughing in the fall, and fertilization based on soil tests.

A seventh site in Anhui Province will focus on problems related to double-cropping soybeans following winter wheat. In this region, farmers commonly burn wheat straw after the harvest, soybean seedlings are prone to problems due to poor soil structure, and fertilizer is spread on the top soil where few of the nutrients reach the soybeans. Root rot and grubs are caused by bacteria and eggs on wheat straw. This site will feature no-till planting of high-protein soybean varieties among wheat stubble, more efficient fertilizer application, pest prevention, and low-loss harvesting machinery.

The pilots aim to attain yields of 200 kg/mu (about a third more than typical yields). They hope to reduce chemical fertilizer and pesticide use by 10%, achieving cost savings of 15%. The entire process will be mechanized.

The budget is 200,000 yuan ($30,000) for each of twenty-eight 2000-mu fields (four at each of the seven sites). 100,000 yuan will cover production materials--seed, fertilizer, pesticide, land rent, and other costs. Another 35,000 yuan will cover the salaries of technicians and seasonal laborers. Other expenses include maintenance of equipment, testing of soil and soybeans, travel for project participants, and hiring of machinery services for planting, harvest, etc.

Each site's demonstration project will revolve around a local agricultural technology extension center, and experts from other institutes will be invited for consulting. County officials are assigned to develop working groups and coordinate all tasks to make sure they get done. The results are to be disseminated by radio, TV, newspapers, Internet, and other media.

Monday, June 13, 2016

Agricultural policy officials in China say their country will move toward a system of market-driven pricing supplemented by farmer subsidies decoupled from prices, starting with the reform of corn policy announced in March. Officials acknowledge that tinkering with prices has created an expensive problem, but they also acknowledge that their "target price" subsidy experiments have not succeeded yet.

The comments were made in an article from Business Reference News that was posted on many government-sponsored web sites in China today. Officials explain that the government began setting floor prices for rice and wheat after the grain market was liberalized in 2004. Minimum prices were meant to act as a floor under market prices to protect farmers from downside risk. "Temporary" or "provisional" reserves were established for corn, soybeans, rapeseed, sugar, and cotton as officials fretted about unstable prices during 2007-08.

Top ag policy advisor Chen Xiwen told Business Reference News that problems arose after officials began raising the floor prices every year to cover rising production costs. The temporary reserve price for corn rose from 0.7 yuan/500g in 2007--the program's first year-- to 1.12 yuan/500g in 2014. The rise in prices resulted in Chinese prices becoming de-linked from world prices. Chinese commodities lost their international competitiveness as prices in the global market began to fall. Corn production has risen to a record volume, but imports of substitutes for corn flooded into the market, and domestic corn went into government warehouses. Although the temporary reserve price for corn was cut to 1 yuan/500g last fall, it still exceeded the international price.

Vice Minister of Agriculture Yu Xinrong explains that a new mechanism for agricultural price formation will have two characteristics. Agricultural prices will be completely determined by the market. Second, a subsidy separated from price will ensure that returns to farmers in the most competitive producing regions will remain stable from year to year.

Business Reference News says the reform of the corn market system announced for this fall is a model for the future path: prices will be completely marketized, with all types of buyers free to enter the market to purchase corn. Farmers will get subsidies to maintain their income.

Trouble is, no one has explained how the subsidies for corn producers will work, and no one seems to have a workable approach to put in place.

Officials have pinned their hopes on "target price subsidies" as a new approach to subsidizing farmers. Yet, about half of the Business Reference News article is devoted to explaining problems with "target price" subsidy programs encountered during the last two years of pilots for cotton and soybeans. Officials have not given up on the target price subsidy, but there are "many difficulties to be solved."

According to Wang Xiaoyu, vice-secretary of the Heilongjiang soybean industry association, no one seems to be happy with the target price subsidy for soybeans. Farmers complain that a single target price is inappropriate because prices vary from place to place, some farmers have lower production costs than others, and prices fluctuate over the course of the marketing season. Last year, the soybean price began at 4600 yuan/metric ton after harvest but fell to 4060 yuan later in the season. The government apparently collected prices to set the subsidy while prices were at their high point. By late spring the soybean market had seized up--farmers didn't want to sell at a low price and processors didn't want to buy at the price farmers wanted. Grassroots officials in soybean regions complain about the difficulty of implementing the program. It takes a lot of work to verify the area planted and prices, much of the data reported to them is falsified, and they have to deal with disgruntled farmers.

Mr. Ye Xingqing, an agricultural economist with China's Development Research Center, says the cotton target price pilot has succeeded on only one of three criteria. Ye hails the program for narrowing the difference between prices of domestic and imported cotton, thus removing the severe distortion that existed during 2011-2013 when the "temporary reserve" supported the Chinese price about 40% above the international price. However, Ye says that the target price subsidy still distorts production decisions of cotton producers because the subsidy is tied to area planted and volume of cotton sold. Mr. Ye also worries that the target price exceeds China's "fixed external reference price" which means the subsidy "could be above the 8.5% limit" set by WTO for China's "amber box" subsidies.

Meanwhile, the minimum price programs for wheat and rice have been announced for 2016 with no significant reforms, and government stockpiling of newly-harvested wheat is proceeding. Xinjiang Autonomous Region plans to purchase 1.5 million metric tons of wheat for the "temporary reserve" (Xinjiang is not covered by the minimum price program) at a price of 1.18 yuan/500g.

Ye Xingqing urges prompt reform of the price formation system, worrying that the divergence between Chinese and international prices could worsen if no action is taken. According to Economic Reference News, officials estimate that it will take two to three years to install the new system of market-driven farm prices and decoupled subsidies.

The facility in the southern Ukraine port of Nicolaev will reportedly have capacity to handle 2.5-million metric tons of grain annually, with 143,000 metric tons of storage. The Ukrainian port will be wholly owned and operated by COFCO for its exports of corn and other grains.

According to the description of the investment, this is part of COFCO's "13th five-year plan" strategy to achieve an "unmatched global layout" covering "the entire industry chain." COFCO's expansion is in concert with China's national "one-road, one-belt" strategy of projecting its influence in a string of countries from its border into Europe.

The investment strategy also dovetails with China's national strategies of gaining control over the whole supply chain for farm commodities--including trading, logistics, and processing--and diversifying sources of imports.

The Ukrainian investment "basically completes" COFCO's international acquisitions. On March 3, COFCO gained full ownership of Noble Agriculture and renamed it COFCO Noble Agriculture. With the acquisition of Noble Agriculture and Nidera, COFCO's international assets now comprise 52% of its balance sheet.

COFCO's acquisition of Nidera gave it control of an advanced facility at the Romanian port of Constanta. According to the Chinese description, this gives COFCO strategic access to corn, wheat, barley, and rapeseed in Romania, Hungary, and Serbia for export to Europe, the Middle East, and Africa. COFCO Agriculture also has a sunflower seed oil-processing plant in the Ukraine.

COFCO says it exports 1.5-to-2 million metric tons of corn, barley and other grain from Ukraine to Europe, Iran, Southeast Asia, and North Africa. Nidera reportedly exported a record 4 million metric tons from the Black Sea region during 2015.

The company's communist party secretary told journalists that COFCO plans to further expand and improve its global layout to implement the country's national grain import and export strategy with the greatest possible efficiency as part of China's "national team."

"Efficiency" is not the adjective that comes to mind as a description of COFCO's financial performance. Another recent article points out that COFCO's acquisitions of Nidera and Noble Agriculture vaulted the company into the ranks of the large "ABCD" multinational companies when measured by assets, but its profitability is still relatively weak. COFCO's $62.4 billion in assets after its rank the company at number 3 in size among multinational grain companies in the world . However, the article points out that its net income of $200 million is relatively weak, comparable to that of the number 4 ABCD. COFCO's profitability looks even weaker when one considers that the company gets $712 million in subsidies from the Chinese government. Without the subsidies, COFCO apparently would be making losses.

The subsidies do not include the windfall profits COFCO makes by importing grain at low 1% tariffs using import quotas set aside by the government for use by designated state trading companies--primarily COFCO. Ninety percent of the 9-million-ton tariff rate quota for wheat is reserved for state trading companies, while hundreds of private sector companies must scramble get a share of the 10% of quota divvied up among them. The state share of the 7.2-million-ton corn quota is 60%. Presumably, COFCO uses the state-owned quota to import corn from Ukraine and will use it to import wheat from Russia.